Bond insurers face new payments on CDOs-report

NEW YORK (Reuters) - U.S. bond insurers, including MBIA Inc (MBI.N: Quote, Profile, Research, Stock Buzz) and Ambac Financial Group (ABK.N: Quote, Profile, Research, Stock Buzz), will likely need to make new interest payments for structured deals backed by residential mortgage debt, as more homeowners default on their mortgages, Citigroup analysts said on Wednesday.

This could place an even greater strain on the companies' cash flows at a time when they are already grappling to sustain capital levels adequate for their top ratings, the analysts said in a report.

MBIA said the Citigroup report fails to account for the protections built into the deals MBIA insures.

Bond insurers have written protection on collateralized debt obligations, or CDOs, which pool residential mortgage-backed debt, and these are increasingly defaulting as they breach terms and conditions in the deals.

Around $190 billion in CDO debt based on residential mortgage bonds issued in 2006 and 2007 have hit notices of default, representing around 55 percent of the total issuance of these deals, Citigroup said.

Most of the defaults have been due to the deals breaching the required ratios of collateral, which typically stops interest payments except to holders of the most senior-rated CDO pieces.

Recently, however, some high-grade CDOs backed by mortgage debt have been defaulting because they have missed interest payments to certain tranches in the deals, known as non-payment-in-kind tranches.

This is worrying for bond insurers -- also known as monolines -- because they have insured payments on a number of high-grade deals, Citigroup said. When an issuer fails to pay interest on a deal, the insurers are responsible for taking over payments to the holders of the debt.

"We expect to see a significant number of CDOs, particularly high-grade asset-backed CDOs, triggering events of default in the near term because of missed interest payments," the Citigroup analysts said.